Why investors are betting big on mortgage lending business

But as the National Housing Bank hands out eight licenses for home finance companies it gets clearer that the next big boom that investors are betting on might be mortgage lendingShilpy Sinha | ET Bureau | November 12, 2015, 12:30 IST

Rising competition may be a boon for home buyers and the industry which is coping with a slump that doesn’t seem to be letting up. Some fear that excessive competition when rates are headed lower could lead to aggressive lending habits. "Today, housing finance is a stable but scalable business,"said AbizerDiwanji, national head, financial services, EY India.

"Given there is rising demand and expectation that the pricing will come down in a depressed market, it is a good business to be in."

EXPOSURE TO RISKS

To gain market share, new housing finance companies may indulge in a price war, and in order to get customers, would even go as far as relaxing their lending rules.

"Companies and banks are trying to woo customers with lower interest rates, which is good for customers, but there could be a bubble due to everyone concentrating on the same segment and also topping up loans when they do a balance transfer," said Kalyanaraman of NHB.

Things may not have turned worse for mortgage lending here, but the lenders are becoming generous. The average new loan for first-time buyers has gone up to 4 times the borrower’s income from 2.5 times a decade ago. HDFC offers mortgages above 4 times the borrower’s income. Payment on such large loans is manageable when the rates are low but could be a challenge when rates rise.

Furthermore, the falling interest rate cycle may be more conducive to get into the lending business, but there will be a problem when the cycle turns. Indeed, HDFC has been in two minds on whether to be a stand-alone entity or merge with its subsidiary HDFC Bank as the cost of funds for banks are lower than for an exclusive finance company. The merger issue crops up every time the interest rate cycle goes up.

"Interest costs for a new HFC (housing finance company) will be higher than that of existing players and that coupled with a higher operating cost structure will make it difficult for the HFCs to compete on rates with banks," says HDFC’s Mistry.

Housing finance companies as a business may be attractive but the fact that they are getting into smaller towns and deal with a different demography could expose them to risks. They may now be as hot as MFIs were a decade ago, but may not be fraught with similar risks.

At the turn of the century, MFIs became hot bets for investors as profit margins were high. It boosted the valuations of companies and some of them grew. Bandhan is a bank. Some are planning an IPO. But some aggressive practices made them political targets that brought a bad name to the industry.

"Investors put money in MFIs expecting higher returns. Housing finance is low-risk but with a strong repayment history with a longer tenor," said Anil Sachidanand, MD & CEO, Aspire Home Finance.